Question

If an economy experiences deflation, the real interest rate will be greater than the nominal interest rate. will be negative when the nominal interest rate is positive. will be less than the nominal interest rate. will be equal to the deflation rate, so long as the nominal interest rate is positive.

Answer 1

Answer:

will be greater than the nominal interest rate.

Explanation:

Inflation can be defined as the persistent general rise in the price of goods and services in an economy at a specific period of time.

Generally, inflation usually causes the value of money to fall and as a result, it imposes more cost on an economy.

Deflation can be defined as a fall or decrease in the overall price level of goods and services in an economy, so that inflation becomes negative while causing an increase in the purchasing power of a currency. Thus, an economy experiences a deflation when its inflation rate becomes negative i.e falls below zero percent (0%).

Furthermore, if an economy experiences deflation, the real interest rate will be greater than the nominal interest rate due to a negative inflation.

Mathematically, deflation is given by the formula;

Real interest rate - Nominal interest rate = - Inflation